CBN Battles to Take Control of the Forex Market: Our Position

Policy Statement 01

We have observed the raft of policies’ issuance by the Central Bank of Nigeria (CBN) in its bid to facilitate harmony and stability in the nation’s foreign exchange market. One of the policies addresses the Net Open Positions of Nigeria’s Deposit Banks. The policy relates directly to concerns over the quantum of foreign currencies in the vaults and, or books of the banks and the holding timelines.

The prudential guidelines as issued by the CBN, unveils the gaming of the foreign exchange market by Nigeria money deposit banks who hoard forex which, they had either borrowed from foreign jurisdictions or raised locally on long term basis, and profiteering on the forex holdings by refusing their customers’ access to the forex while bidding the Naira to depreciate and exploit the market, thereafter, by offloading the forex into the market when the Naira declines to their target percentage depreciation.

On this count, we applaud the directive of the CBN to the banks to immediately sell off to zero level, the foreign currencies they are holding on the long term and to reduce their short term holding by 20 per cent of shareholders fund, within 48 hours. It is estimated that between $6 – $7 Billion is kept by banks in Long Positions either in cash or locked up in FX swaps deals. This, truly captures the CBN’s capacity for regulatory oversight. 

An adjunct to the Net Open Position directive is the removal of allowable limit of exchange rates quoted by International Money Transfers Operators. This directive simply obliges International Money Transfers Operators to undertake to transfer forex to Nigeria at prevailing rate rather than the former policy of undertaking to transfer forex at the preceding day’s closing rate with a -2.5% or +2.5% charge. 

This constricts possible market reflection on the rate and, thus, was a disincentive to channeling Diaspora funds to the Nigerian market. The new policy translates to an incentive to IMTOs to redirect forex to the official market rather the hitherto practice of diversion to the parallel/black market. 

This will, ultimately, rechannel more Diaspora funds to the Nigeria forex market with possible enhancement of forex liquidity which will ameliorate demand pressure with subsequent appreciation of the local Naira currency.

As a corollary to effecting this policy, the CBN has banned banks and financial technology companies (fintechs) from international money transfer services. By restricting banks and fintechs from international money transfer services, the CBN is also strategically manoeuvring to fortify the currency and stabilise the forex market.

Instructively, following the these CBN’s directives to banks, the volume of dollar transactions by willing buyers and willing sellers as determined by the new directives, consisting of banks and exporters and investors, reportedly increased by 85.36 per cent in the Nigerian Autonomous Foreign Exchange Market, while the daily FX market turnover increased to $134.07million last Wednesday from $72.33million last Tuesday at the official market.

Though if these banks sell their holding positions at prevailing rate on the cue of the Net Open Position directive, they would still be making a killing, however, we are not under the illusion that these policies will immediately change the face of Forex transactions in the country and drive influx of liquidity into the market as anticipated. This is because many banks can procedurally undercut the effectiveness of the policy because these dollar assets are not in cash.

The banks can approach the CBN to grant a forbearance and will subvert the process by excuses such as negotiating the conversion of foreign currency loans to naira loans.

Even at that, in our consideration, this bold step reflects the CBN’s unwavering commitment to safeguarding the financial system and ensuring economic stability in Nigeria. We are strongly persuaded that if the apex bank continue this proactive oversight trajectory it would eventually take control of the present volatility being witnessed in the market.

Chief Niyi Akinsiju, F. Cifian
Independent Media and Policy Initiative

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